Monday, November 26, 2012

Eurogroup decides on Greek fudge

Eurozone finance ministers finally agreed on measures to grant Greece two additional years for austerity and structural reforms. These measures remain highly conditional and are no guarantee to avoid debt forgiveness in the future.

During last night’s Eurogroup meeting, the Eurogroup gave the principle green light to pay out the next tranche of the bailout programme amounting to 43.7bn euro. At the same time, the Eurogroup agreed on several possible measures to grant Greece two additional years for its austerity measures and structural reforms.

The possible measures are the following: i) a lowering by 100bp of the interest rate charged to Greece on the bilateral loans of the first bailout package; ii) a lowering by 10bp of the guarantee fee costs paid by Greece on the EFSF loans; iii) an extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years; iv) a commitment by Member States to pass on to Greece's escrow account, an amount equivalent to the profit the ECB and national central banks make on their Greek bond holdings under the SMP programme.

To benefit from the above measures, however, Greece will also have to play its role. In fact, the above measures will only be implemented gradually and only under certain conditions to restore debt sustainability. To ensure Greek debt sustainability without debt forgiveness, the Eurozone agreed on a series of measures. The escrow account has become more important as not only all privatization revenues have to be transferred to this account but also the “targeted primary surplus as well as 30% of the excess primary surplus”. Moreover, a debt-buy-back could also be part of restoring debt sustainability. However, this programme is anything but certain as the rather vague official formulation of “the Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.”

Taking all these measures together, the Eurogroup provided the expected fudge to keep Greece in the Eurozone. It is obvious that even the Eurogroup does not expect that this was the last word on Greece. Even if debt forgiveness was not mentioned, the sentence that Eurozone countries will consider further measures to ensure that Greek debt can reach 124% of GDP in 2020 and a level “ substantially lower than 110% in 2022” is rather telling.

At first glance, the political will to give Greece two additional years for austerity and reforms has finally been substantiated. However, as so often in the past, there are still some elements in the Eurogroup’s decision that look clear and good at the end of a long Brussels’ night but which could lose their congeniality after sunrise. Here are just a couple of them: the Eurogroup’s commitments remain highly conditional, some national parliaments (like the German Bundestag) still need to agree to the measures and the debt-buy-back scheme looks anything but certain. Chances are high that this month’s meetings were not the last night-breaking discussions on Greece.

After three meetings this months and a total of more than 24 hours of discussing and negotiating, the Eurozone countries have put their money where their mouth is. The political will to reward the Greek austerity and reform measures has already been there for a while. Now, this political will has finally been supplemented by financial support. However, it is clearly not a carte blanche for Greece but rather a very tight leash.